Working Paper: NBER ID: w9001
Authors: Denis Gromb; David Scharfstein
Abstract: This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. By contrast, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this external labor market leads to ex post inefficient allocations, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low entrepreneurship equilibrium, the market for failed entrepreneurs is thin, making internal labor markets and intrapreneurship particularly valuable. In a high entrepreneurship equilibrium, the active labor market reduces the value of internal labor markets and encourages entrepreneurship. We also show that there can be too little or too much entrepreneurial activity. There can be too little because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too much because a high quality labor market is bad for entrepreneurial incentives.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intrapreneurship (L26) | reemployment prospects of failed intrapreneurs (L26) |
| failed intrapreneurs (L26) | stigma in the labor market (J79) |
| failed entrepreneurs (M13) | imperfect external labor market (J46) |
| low entrepreneurship equilibrium (D59) | thin market for failed entrepreneurs (M13) |
| high entrepreneurship equilibrium (D59) | diminished value of internal labor markets (J29) |
| entrepreneurial activity (L26) | labor market quality (J24) |
| too little entrepreneurial activity (L26) | negative effect on labor market quality (F66) |
| too much entrepreneurial activity (M13) | decrease in effort among entrepreneurs (L26) |
| entrepreneurial activity (L26) | multiple equilibria in labor market (J29) |